Expenditure cuts appear to have been the most painful element for the Slovak economy in the short term, stated the Financial Policy Institute (IFP) in its latest report in which it looked into the impact of the Government's consolidation packages in recent years. The Institute, which belongs to the Finance Ministry, added that the least painful impact on economic growth has been an increase in indirect taxes. Slovakia has seen three periods of fiscal consolidation - between 1993-1995, 2003-2005 and 2011-2013. IFP stated that despite significant consolidation efforts during the second of these periods, economic growth accelerated. "This was due in particular to a positive situation in the world economy, Slovakia's accession to the European Union, structural reforms, and a low starting level for the economy”, read the report. The consolidation that began in 2011 reduced economic growth by between 1 and 1.8 percentage points.
Five years ago the Government pledged to reduce the deficit below 3 percent of GDP by 2013. "According to the latest estimates, consolidation measures amounting to €1.6 billion were required to achieve the final balance of about 2.8 percent of GDP last year. They reduced the economic growth by less than 0.2 percentage points”, read the report. The Institute concluded that cuts in expenditure and labour costs appear to be less harmful for the economy when compared to the reduction in state investments. On the revenue side, an increase in taxes seems to have had a smaller negative impact on the economy than increases in levies.
Some analysts say that a detailed view on the budget development is not as impressive as it might seem at the first sight. “The deficit was smaller than planned primarily due to the underutilisation of EU funds and related co-financing, which were used at less than 60% of budgeted amount, and the dissolution of a reserve created in connection with the downsizing of the private pension scheme. Both measures may have a negative impact on future economic growth. Higher taxation policy did not bring expected increases in revenues”, reads an analysis of VUB Bank’s Economic Research Department.
